The biggest miners in the FTSE 100 are cutting costs and sounding cautious,
but Questor sees a buying opportunity in Rio Tinto and BHP Billiton.

Rio Tinto, the third biggest miner in the world, has lowered its estimates for China’s growth this year to “just below” 8pc, down from the around 8pc growth it expected in August, chief executive Tom Albanese told investors yesterday.

“Significant stimulus efforts have been announced in China, the US and Europe, but it’s uncertain exactly when we will see the impact of these on our markets,” he said. “We are somewhat more cautious on the outlook over the next few quarters.”

As a result, Rio plans more cost cuts across its business, having already made savings of $500m (£312m) a year.

Separately, its FTSE 100 rival BHP Billiton, the world’s biggest mining company, said it was “premature” to put a number on redundancies in its iron ore business, after reports that 200 jobs may be lost out of the division’s roughly 6,000 staff in Australia.

From China, the economic watchdog now expects 7.8pc growth rather than 8pc in 2012, and 8.2pc rather than 8.4pc in 2013. Miners’ share performances are heavily tied to sentiment around China, given that it is the biggest commodity consumer in the world.

But is it really all that bad?

The message from Rio over its own downwards revision to its China forecast was that it is more a matter of timing than anything else, as Beijing’s efforts to support the economy come later than anticipated due to the domestic political situation. As the company said, it “expects China’s stimulus packages to take effect progressively after the Chinese leadership change and has therefore lowered its estimates for Chinese GDP growth this year”.

So in Rio’s eyes it is a question of when, not if, the cavalry is coming, as stimulus measures kick in.

Reinforcing that argument, China’s central bank injected around £26bn into its money markets, sending the message that it is prepared to act. Investors were also cheered by Rio’s forecast for solid copper output, which meant the company’s shares rose yesterday despite the revisions over Chinese growth.

Meanwhile, BHP enjoyed strong demand from the debt markets as it raised A$1bn (£637m) in its first bond denominated in the Australian currency in 11 years. The bond issue, the biggest ever marketed in Australia by a company outside the financial sector, was heavily oversubscribed, with talk that the order book was around A$2bn.

Undoubtedly, the two mining giants have not escaped the slump in share prices seen across the mining sector in recent months, as global economic sentiment has soured.

Yes, China is slowing. But the massive process of urbanisation taking place across the world’s younger economic powers is a story that will be told for decades, not years. This column last tipped Rio Tinto in September, and last recommended BHP Billiton in August. With both companies’ shares trading around the same levels today, Questor says they remain a BUY.

At a push, BHP is preferred over Rio because it is more diversified away from iron ore, the steel-making ingredient, towards the later-stage commodities on which China’s maturing economy will increasingly rely.